Gross domestic product (PPP)

PPP is an abbreviation from Purchasing Power Parity and it is a measurement that helps us to specify the prices of selected goods and services when compared to the same goods and services in other countries.

We use the PPP factor in order to better understand the real values between countries - without taking into account exchange rates of currencies, poverty, tariffs, and many other transaction costs that would occur otherwise.

How does PPP help us in comparing the values of different countries?

For the purpose of explanation, let us assume that we would like to compare the economy of the United States and China. If we find two identical PCs in the States and in Hong Kong, then we will notice that they cost $500 in the US and 4000 HK Dollars in Hong Kong. As a result, the PPP theory says that the exchange rate should be 8 HK dollars for every 1 US dollar.

Unfortunately, the price for every specific item varies in every country. That is why providing exchange rates for particular goods or services implement huge discrepancies. This is why we apply the basket of goods, which basically allows us to throw a lot of different items and then calculate the difference.

What does the Gross Domestic Product look like when we take PPP into account?

The top 5 of countries with the highest Gross Domestic Product (PPP) is way more bizarre than one can think. First of all, the difference between number one and number two is not as high as one could expect.

In terms of GDP PPP, the first place goes for China with $23.5 trillion. If we compare it to the regular GDP, it is more than $9 billion increase for the Chinese. The second place still goes for the United States, which can boast with the GDP PPP of $21.4 trillion. India closes the podium with the GDP of $9.5 trillion. Japan has $5.5 trillion, and is ahead of Germany with $4.6 trillion. Interestingly, Russian Federation was rather low at the standard GDP ranking at position 11, but if we include the purchasing power parity, then it jumps at 6.

What about the GDP PPP per capita?